Now suppose that you think the returns distribution is well approximated by a normal distribution.
The normal distribution is a two-parameter distribution: mean and variance, therefore, you
can estimate those parameters without any complex econometric approach.
Plot the histogram again, but this time add a normal density over the histogram to assess
how good of an assumption normality is.
(Hint: Stata’s histogram command has an option
to do this automatically.
Compute the Value-at-Risk at the 99% confidence level based on the estimated normal dis-
tribution of returns.
Remember that the VaR is the maximum loss (or minimum returns in
this case) that could occur with probability 1 ? , i.
, 1% of the cases.
How does the investment limit that you would establish for the trader, in dollars, compare to
the limit estimated based on the empirical distribution above?